What is an abusive tax scheme? You may have heard of a program or scheme that promises to eliminate or substantially lessen your tax burden and taxes due to the Internal Revenue Service. A promoter of such a scheme is likely to use financial instruments such as a trust and/or pass through entities such as a limited liability company or limited partnership. When these programs and schemes are used improperly and to facilitate tax evasion, IRS may criminally investigate the scheme and prosecute the promoters as well as investors. You should remember that if something sounds too good to be true, it could be, and could lead investigation by the Internal Revenue Service and potential criminal tax charges. It is recommended that you discuss any potential tax scheme or program with a tax attorney. The article below will provide more information regarding abusive tax schemes, but this article is for informational purposes only, and please always discuss your specific issues with a tax attorney.

Overtime tax schemes have developed from relatively simple single structure arrangements into more complex and sophisticated overall schemes and strategies that take advantage of foreign jurisdictions and financial secrecy laws. The Internal Revenue Service Criminal Investigation has a national program to fight these illegal tax schemes and programs and prosecute violators with criminal tax charges. Our government has and will continue to criminally prosecute the promoters of illegal tax schemes and those who play substantial roles in aiding or assisting the tax scheme, which could include investors into the tax scheme. The biggest question when initially looking at these issues is, what constitutes an abusive or illegal tax scheme and could lead to criminal tax evasion and criminal tax charges? In short, an abusive tax scheme that could lead to criminal matters would violate the Internal Revenue Code and related federal statutes. Furthermore, generally the violations of the federal tax law and related statutes would use domestic or foreign trusts as well as pass through entities such as partnerships as vehicles in violating the federal tax laws. In recent years, foreign bank accounts and other financial accounts have been used more frequently to accomplish tax evasion because of reporting issues (one may refer to FATCA for further information). Many foreign banks and financial institutions do not report income such as interest and dividends, and thus there is no record of the income to the trust, entity and individuals. With no reporting to the federal government, and no reporting on applicable tax returns, the income goes unreported.

As stated above, foreign accounts or trusts may be used frequently in illegal tax schemes. A common scheme that may have many variations may flow as follows. A United States citizen has a business in the United States and also forms a foreign corporation and foreign bank account in the same name of their US business. When checks are received, the checks are processed through the foreign business and foreign bank account. The foreign account will likely be in a foreign jurisdiction that does not report income and related items to the US government. Thus, the income goes unreported on the taxpayer’s tax return and there are no 1099s issued to the US government to have any knowledge of the account and thus income going into the account. Some schemes will involve a foreign business that issues invoices to a United States business. The invoices are paid to the foreign business and a deduction taken by the US business, but the income of the foreign business is not claimed. The business are commonly owned and the US citizens involved are not claiming the income of the foreign business. Again, we have unreported income into a foreign account, and likely interest and/or dividends in a foreign account that would not be reported. The above examples could go many more layers deep, but provide good examples as to how an illegal tax shelter or abusive tax scheme could be established.

The above article has been prepared by John McGuire of the McGuire Law Firm for informational purposes, and should not be relied on as legal advice. Mr. McGuire is a tax attorney, representing individuals and businesses before the Internal Revenue Service and can be contacted directly through the McGuire Law Firm.